US Energy Insights with our American Experts

We have a very special episode today. Here come the Americans, and

I'm not talking about the TV series. We are joined by the two US

colleagues, Danielle and Michael, that are talking about

the energy american style a little bit. They're giving us their

insights and predictions on what we can expect

in the future. Freight up.

Hello and welcome back to Freight. My name is Davide and I will be your

host as we navigate the seas of freight and commodities today. We

have a very special episode for you with a focus on the US energy

sector with two new guests that you haven't heard before, Daniel Kem

and Miguel Andouar. Daniel is our senior development executive

in us, while Miguel is our fuel oil broker and is also based in the

United States. Fernanda cannot be with us this week, but we shall

still sail on with this week's episode. But first,

let's start with our usual roundup of the latest commodity and macro

news. China's industrial production

expanded by 7% year on year in January February

2024 combined, and this was faster than a

6.8% growth in December 2023.

The data surpassed market forecast of 5% and this was

the fastest expansion in industrial output in almost two years. The

bank of Japan raised its key short term interest rate to

around 0% to 0.1% from

-0.1% matching the market expectations

and ending freight years of negative interest rates. This

is the first interest rate hike since 2007. Brent

crude prices hit a four month high above

$85, with the IEE predicting a

market deficit due to OpEC plus voluntary cuts. The

EU is looking to levy tariff on grain imports from Russia

and Belarus, amounting to a 95 euro per ton

duty on cereals from the countries.

The dry freight FFA market renewed its volatile zeal last

week. Some serious Cape FFA movement on Wednesday, with an

intraday March contract range of 33,750 to 35

500 before an afternoon selldown. As

has been the case this year with the FFA market, the movements on the

smaller ships were less volatile, but we still saw

some good news on the prompt contracts. The Panamax

five TC April contract was at $19,300

last Tuesday to almost 22,000 on Monday. The Apple

supermax contract moving from 15,125 last

Tuesday to 16,075 on Monday. This

week. Index wise, they printed 33,093

on the C five TC,

20,757 on the P five TC,

14,861 on the stern TC

and 14,176 on the handy seven

TC, marginally up on both the Supra and

the handy index. A good 18% increase on the

Panamaxis. But four week on week on the

C five Tc of 2.5%. On the iron ore

front, the 62% index laid again week on week and went

down 2.2%, hovering precariously above the

psychological $100 threshold at 107 and

$0.90. Fuel oil contracts are both up. The

high sulfur fuel oil Singh 380 up

5.5% to $475.48

and the very low sulfur

single 5% index is up 3.2%.

$631.58.

Daniel Miguel, thank you very, very much for joining us today

for this US energy special episode. So

there is a lot that has been going on in the US energy space

and has been going on for the last couple of years. So just to

remember, some of the main points has been the Inflation Reduction act,

which had some huge subsidized for the US companies in the

green energy and also like in the critical mineral production and

processing, the growth of Tesla, the new

political schism between the left and the right on this issue. It will be

really great to hear your views on the effect on

the trajectory of the US energy market. The energy

market is going through an interesting, let's say, moment, to put

it this way. We have on one side as EV

cars, especially with Tesla, are growing in the US market. But

then on the side, we see us oil production as we're seeing the news

increasing as well. Last year, record level in history at

12.9 million barrels per day. The tricky part about

this is that even though we think that we're going clean in one way, when

you look at the US electric grid, 60% is still fossil

fuels with like 20% coal or estimate.

So we're looking like we diversion from fusel fuels, but we use it

in the back end electric grid as well. So we have to be careful with

that. And that's what we're looking at it. And we also might be looking

at an instance scenario where Asia might be looking more

export, more imports or exports from the United States to Asia as

well. So that might be related to the oil production as

we have in development, interested in new routes with the geopolitical

conflicts in the Red Sea and the issues in the Panama Canal as

well. Yeah, I would agree with, you know, the war in Ukraine

is what, two years in? That was a massive supply shock for

the know. You have countries that used to produce a vast

amount of oil, like Venezuela, that is literally off the

market and people are trying to reengage there. So

the United States basically stepped in as almost,

albeit a swing producer. Here you have OPEC

curtailing their production, holding fast to their

cuts. In 2024, the IEA is

forecasting that there'll be a slight supply deficit by the end of the

year. Oil inventories are, while not on their

lows, are still below the five year average.

So there are some real underlying

physical reasons why the energy

markets continue to be supported. Two days ago, you had a

drone attack on a russian refinery. That's going to create some

supply issues for diesel and gasoline in Europe, I would

imagine. And they're going to need to see

some cargoes and some shipments, probably from the US or diverted

from Asia or something like that. Maybe. But it's an interesting

setup for the summer driving season, which is going to basically kick off

in another month, month and a half. I'm glad they brought up the

OPec cuts. And that's something always, as you probably know as well,

that always take that with a grain of salt. Because

historically speaking, when we look at OPEC agreements, they struggle to

put it in one way, to meet their quotas or to fulfill the

promises and their quotas, because they all have different agendas, they all

have different policies, and starting from Russia and

Saudi Arabia. So we have to look at, even though I'm personally

bullish in the second quarter, end of this quarter, second quarter.

But based on the OPEC cuts, I take it with a grain of salt.

Based on their previous history or not fulfilling their promises.

Yeah. Miguel. Daniel, just to jump in 1 second,

because you have actually been potentially

reading my mind, because there was actually one of the follow up questions that I

had and is about specifically the OPEC plus

cuts. So as you mentioned, we've been following the news

about the production cuts. Also very recently,

Iraq has decided to join again, like, and

cut the exports to 3.3 million barrels a day in the coming

months. And then, as Daniel pointed out earlier, there we have the

US that seems to be raising the supply, and then we have

the latest news from the US Energy Information

Administration that raised the outlook by 260,000

barrels per day to 13.19 million barrels. So my

question is connected a little bit to what you say before. Do you think

that these increase in supply will contribute to offset

the effects that are coming from the OPEC plus production

cut? No, I mean, first and foremost, look, we're all

old oil guys when it comes to OPEC. You buy the rumor, you sell the

fact, right? That was the old adage. In the

markets, you have a lot of countries, a lot of

economies in the countries in the Middle east that

have become very dependent upon a price point for

oil that is quite high, and they're doing

everything they can to keep it above

$75 a barrel area

and the Saudis need for their

economy. I read some of the Saudis needed plus $80 crude

oil to balance their budget on their expenditures

for the year. So I do think that there are going to be

supply shocks and disruptions, which is why I

think it's really important for our clients to

be speaking to our brokers and to be talking to them on a

daily or at least weekly basis to hear

what our brokers are seeing and what they're seeing going on in

the marketplace, because I think there is a

definite correlation going on with the price of

energy and inflation. You are seeing

a persistently high energy price, and the cost of

what it's doing to goods and services are just getting passed through the

economy to the consumer. It's creating a ticklish situation

for central banks, because central banks want to cut

rates again and stimulate the economy and do things like this. But

if oil services stay high and energy prices in particular

stay high, you're going to have inflationary

pressures that might not allow these central banks to do

that. You have Wall street in the marketplace right now talking

about the Fed is meeting right now. So the market

expects the Fed to come out of the meeting after 02:00 p.m. On Wednesday

and say that they're going to leave rates unchanged. And they expect that in

the next meeting, but they're expecting after that rate cuts to come

in. And if you get persistently high energy prices

and that translates into high inflationary

numbers, I don't think you're going to see that. And to Dan's

point and ritual perspective, when you look in context, I think that the

key component here for the OPEC going to be the Saudis. And

on like 2014, which was a different purpose, they

were pursuing market share, as Dan was pointing out, right now, they're looking

for a point price, a price above 80s, based on the

commitments they have made for public policy, balancing their budget.

So they're looking on a particular price more than market share.

So it's a different context in 2014, when they

pretty much flood the market to take us shale production out of the

market. So that's a very good point too, as well. And to

Dan's point as well, when you look at increases energy prices,

which is one of the main factors for inflation, you look at the last data

of the United States. As inflation data went up, consumption

decreased, which is equivalent to like two thirds of the GDP of the

US. So that's something to take into consideration as

well. And following back on that,

actually, if you will allow me, I'd like to move on one of my

personal favorite topics, which is monetary policy, because of

my previous work experiences. So we have mentioned

earlier that Japan has finally changed its

monetary policy stance after eight years of negative

interest rates in us. As Dan said, we're waiting for the Fed. But

we should also remember that the inflation figures have been

higher than the consensus both for January and

February. As you've mentioned, energy prices are one of the things that

are closely looked by the central banks, and they contribute

to shape the monetary policy stance. So I would like to look

together with you maybe a little bit of the correlation, the relation

between these two factors, and how do they really influence each other.

So, Miguel, maybe we can start with you also, because you recently wrote an

article on that specific topic, didn't you? Yeah. In terms

of the monetary policy, especially the Federal Reserve,

because we all buy and sell in dollars all around the

globe. In my recent article, I was making an emphasis

that for the last year, I guess I believe

it was from July of 2022 until July

of 2023, we experienced one of the most

aggressive, tightening policies from the Federal Reserve in the last 40

years and went from zero point 25 to

5.25, which we know we're an economy, a

financialization economy. Everything is based on borrowing. So that increased

the cost of borrowing, but also it tried to pursue the strength of the

US dollar, trying to fight inflation. But going back to what Dan said,

inflation has a lot to do with the energy in these days. Now, on the

flip side of that, as you strength the dollar, if you buy and sell in

dollars, the stronger the dollar is, the less dollars you're going to

need to buy your crude oil. So it's a very strong

correlation. When you look through history of the US dollar strength and

the crude oil prices for Brent, for Europe, and also for the WTI

in the United States, when you look at the last 180 days,

200 days, you have a correlation around the 75%, which

is pretty strong. So even though the sentiment has

changed, respecting that, for this meeting, the Federal Reserve

was supposed to start cutting interest rates based

on the last data that we mentioned before, with inflation still

persists, it seems like the consensus now has changed that they're not cutting

rates, the expectations for the markets is that they're going to

stay put. But I think that's just one of the

scenarios for the oil prices. I still believe that they're still going to go

up based on other reasons such as supply and demand. And

as Dan was saying as well, with the cuts with OPEC and the United

States trying to balance out that cut from the OPEC.

And it will be interesting what Japan does today as well, because it might

create a dominant effect on the asian currencies as

well. So like we've mentioned the

OPEC cuts, we've mentioned monetary policy. I'd like to

bring on the third guest, so to say, to our table,

which will be the geopolitical tensions. And as

everybody is aware there FIS some ongoing geopolitical

tensions in the Red Sea. They're pushing in general, like the shipping

companies, to actually reconsider the current routes on one end. If you're

opting for a safer but longer route, which is not

going through the Gulf of Aiden, where you're going to have potential houthi

attacks on the other side, the road is going to be longer and then therefore

it's going to cost you more. What are the effects of this decision on the

prices in the medium and long term? First of all,

with over 28 years of experience in the oil markets, I was kind of

impressed at how well the market absorbed

the initial shocks of the Houthi rebel

attacking shipping and whatnot. I mean, prices got firmer, but

prices didn't really explode to the upside either.

And it's a situation that unfortunately, FIS not going to

go away, at least until the israeli offensive

into the rest of Gaza is

completed. And even then I'm sure it probably will stick around.

So I think it's just something the market's going to have to deal with,

or more correctly, the navies of certain countries

are going to have to deal with. But you also have the

russian situation. Both sides are firmly entrenched in

their beliefs and their militia, and that's a situation

that's not going away either. So I would

have to think that the geopolitical shocks

are going to be something that the market is just going to have to deal

with on a daily or weekly or monthly basis. They don't seem to

be situations that are going away. I'm actually surprised

by the resilience of the bunker industry adapting

to new routes, which it does implied that when you look at the map, you

see that in order to make fulfill your orders, you have to do to

be on the safe side to use alternative routes, which

implied in sometimes two weeks, even 20

plus days, which eventually will show up

on the increase in consumption of bunker fuels, marine

gas, oil, as well it's an interesting route that is developing as we speak, which

it combined two things, two elements, what we spoke before about OPEC

cuts and also the alternative routes, which is going to eventually

push Asia markets to look more for oil consumption,

similar to what happened with natural gas in the United States and Europe,

but mainly on the, I would say the west coast, which is a

shorter route, but also on the Gulf coast as well. But overall,

I am actually surprised, as Dan said, they wouldn't be able to absorb the

shock for this long. In other circumstances, I think would

be much, much worse in terms of price spikes. If you ask me

if you could. Express in just like 1 minute your main thoughts, your

main predictions for this year for the oil market, what do you think it's going

to be? Daniel, maybe we can start with you. I would think prices stay

supported. There's all the reasons that we just spoke

know, the tightness in supply, the low oil

inventories across the board. I mean diesel and

gasoline also. But I would think that we're

in late March entering into driving

season. I would really look at Ti to trade

in a, and barring any kind of black swan event

between 75 to 77 and

85, and then if supplies continue

to tighten in the second half of the year, I would think you would have

to raise that band to an $80 to $90 price

range. And that also doesn't take into effect that those

little black swan events that come across every once in a while. I would

look for that kind of pricing structure going forward. Miguel

one of my roles was data analysis back in the day. And I always say

numbers don't lie. Besides the OPEC and besides the United

States production, I think what is my main concern has

been inventory, commercial inventory in the United States, a

global inventory. As Dan was saying, we're heading to driving season.

And you look at how much inventory we have, it seems like it's a health

inventory, but it's 5% under the season

average. And we increase in consumption by

1.7 based on the last revision from the International

Energy Agency. And you look at derivatives like

diesel is 7% under the five season average. So

for me that's more of a concern than anything. As we get into driving

season, as we all know, Americans won't stop

driving and I think the world won't stop

moving either. So my concern is that, and that's why I remain bullish

for the remainder of the year. And I look at from technical analysis

perspective, as we spent like three months in a tight range,

we're out of that range. And now it seems like we're going to get for

the brand on the 90s before the end of this first quarter and

maybe the 85 area for the WTI. Thank

you very much, Miguel. And thank you very much, Daniel. I mean, we could still

see here for another hour or two, but I think that the podcast episode

will be probably too long, but we should do it again. And thank you

very much for joining us. Thank you very much for having me. I really

appreciate it. Thanks for having me. And that's

it for this week. Make sure to subscribe by clicking on the subscribe

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on the next episode of Freight up Break

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